On January 1 of the current year, Dan and Lee formed a partnership to manufactur

Question

On January 1 of the current year, Dan and Lee formed a partnership to manufacture furniture. Dan has been a developer and land dealer. He contributed land from the inventory of his other business that had a $25,000 basis and a fair market value at the time of the transfer of $30,000. Lee contributed $30,000 in cash. Both partners and the partnership use the calendar year and cash method. On October 31 of the current year, the partnership sold the land contributed by Dan for $35,000. Which of the following statements is true?

The partnership reports a capital gain of $10,000.

The partnership reports capital gain of $30,000 and ordinary income of $5,000.

For the current year, Dan reports ordinary income of $10,000 and the basis of his partnership interest is $35,000.

The partnership reports ordinary income of $10,000.

The partnership reports a capital gain of $10,000.

The partnership reports capital gain of $30,000 and ordinary income of $5,000.

For the current year, Dan reports ordinary income of $10,000 and the basis of his partnership interest is $35,000.

The partnership reports ordinary income of $10,000.

Explanation / Answer

Answer is :

a The partnership reports a capital gain of $10,000.

Partnership business is engaged in the manufacture of furniture. So, there is no question of ordinary income on selling of land provided by partner.

Dan interest in partnership business in form of land = 25000

Sale value of land = 35000

Capital gain recognised on sale of land = 35000 - 25000 = 10000

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